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Merton

Create Merton model object for Vanilla, Asian, Barrier, DoubleBarrier, Lookback, OneTouch, DoubleTouch, or Binary instrument

Description

Create and price a Vanilla, Asian, Barrier, DoubleBarrier, Lookback, Touch, DoubleTouch, or Binary instrument object with a Merton model using this workflow:

  1. Use fininstrument to create a Vanilla, Barrier, Lookback, Asian, DoubleBarrier, Binary, Touch, or DoubleTouch instrument object.

  2. Use finmodel to specify a Merton model object for the Vanilla, Asian, Barrier, DoubleBarrier, Lookback, Touch, DoubleTouch, or Binary instrument.

  3. Use finpricer to specify a FiniteDifference, NumericalIntegration, or FFT pricing method for the Vanilla instrument.

    Use finpricer to specify an AssetMonteCarlo pricing method for the Vanilla, Asian, BarrierDoubleBarrier, Lookback, Touch, DoubleTouch, or Binary instrument.

For more information on this workflow, see Get Started with Workflows Using Object-Based Framework for Pricing Financial Instruments.

For more information on the available pricing methods for a Vanilla, Asian, Barrier, DoubleBarrier, Lookback, Touch, DoubleTouch, or Binary instrument, see Choose Instruments, Models, and Pricers.

Creation

Description

example

MertonModelObj = finmodel(ModelType,'Volatility',volatility_value,'MeanJ',meanj_value,'JumpVol',jumpvol_value,'JumpFreq',jumpfreq_value) creates a Merton model object by specifying ModelType and the required name-value pair arguments MeanJ, JumpVol, and JumpFreq to set properties using name-value pair arguments. For example, MertonModelObj = finmodel("Merton",'Volatility',0.03,'MeanJ',0.22,'JumpVol',0.007,'JumpFreq',0.009) creates a Merton model object.

Input Arguments

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Model type, specified as a string with the value of "Merton" or a character vector with the value of 'Merton'.

Data Types: char | string

Merton Name-Value Pair Arguments

Specify required comma-separated pairs of Name,Value arguments. Name is the argument name and Value is the corresponding value. Name must appear inside quotes. You can specify several name and value pair arguments in any order as Name1,Value1,...,NameN,ValueN.

Example: MertonModelObj = finmodel("Merton",'Volatility',0.03,'MeanJ',0.22,'JumpVol',0.007,'JumpFreq',0.009)

Volatility value for the underlying asset, specified as the comma-separated pair consisting of 'Volatility' and a scalar nonnegative numeric.

Data Types: double

Mean of the random percentage jump size (J), specified as the comma-separated pair consisting of 'MeanJ' and a scalar decimal value, where log(1+J) is normally distributed with mean (log(1+MeanJ)-0.5*JumpVol^2) and the standard deviation JumpVol.

Data Types: double

Standard deviation of log(1+J), where J is the random percentage jump size, specified as the comma-separated pair consisting of 'JumpVol' and a scalar decimal value.

Data Types: double

Annual frequency of the Poisson jump process, specified as the comma-separated pair consisting of 'JumpFreq' and a scalar numeric value.

Data Types: double

Properties

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Volatility value, returned as a scalar nonnegative numeric.

Data Types: double

Mean of the random percentage jump size (J), returned as a scalar decimal value.

Data Types: double

Standard deviation of log(1+J), where J is the random percentage jump size, returned as a scalar decimal value.

Data Types: double

Annual frequency of the Poisson jump process, returned as a scalar numeric value.

Data Types: double

Examples

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This example shows the workflow to price a Vanilla instrument when you use a Merton model and a NumericalIntegration pricing method.

Create Vanilla Instrument Object

Use fininstrument to create a Vanilla instrument object.

VanillaOpt = fininstrument("Vanilla",'ExerciseDate',datetime(2022,9,15),'Strike',105,'OptionType',"put",'ExerciseStyle',"european",'Name',"vanilla_option")
VanillaOpt = 
  Vanilla with properties:

       OptionType: "put"
    ExerciseStyle: "european"
     ExerciseDate: 15-Sep-2022
           Strike: 105
             Name: "vanilla_option"

Create Merton Model Object

Use finmodel to create a Merton model object.

MertonModel = finmodel("Merton",'Volatility',0.45,'MeanJ',0.02,'JumpVol',0.07,'JumpFreq',0.09)
MertonModel = 
  Merton with properties:

    Volatility: 0.4500
         MeanJ: 0.0200
       JumpVol: 0.0700
      JumpFreq: 0.0900

Create ratecurve Object

Create a flat ratecurve object using ratecurve.

Settle = datetime(2018,9,15);
Maturity = datetime(2023,9,15);
Rate = 0.035;
myRC = ratecurve('zero',Settle,Maturity,Rate,'Basis',12)
myRC = 
  ratecurve with properties:

                 Type: "zero"
          Compounding: -1
                Basis: 12
                Dates: 15-Sep-2023
                Rates: 0.0350
               Settle: 15-Sep-2018
         InterpMethod: "linear"
    ShortExtrapMethod: "next"
     LongExtrapMethod: "previous"

Create NumericalIntegration Pricer Object

Use finpricer to create a NumericalIntegration pricer object and use the ratecurve object for the 'DiscountCurve' name-value pair argument.

outPricer = finpricer("numericalintegration",'DiscountCurve',myRC,'Model',MertonModel,'SpotPrice',100,'DividendValue',0.45,'VolRiskPremium',0.09,'LittleTrap',false,'AbsTol',0.5,'RelTol',0.04,'Framework','lewis2001')
outPricer = 
  NumericalIntegration with properties:

                Model: [1x1 finmodel.Merton]
        DiscountCurve: [1x1 ratecurve]
            SpotPrice: 100
         DividendType: "continuous"
        DividendValue: 0.4500
               AbsTol: 0.5000
               RelTol: 0.0400
     IntegrationRange: [1.0000e-09 Inf]
    CharacteristicFcn: @characteristicFcnMerton76
            Framework: "lewis2001"
       VolRiskPremium: 0.0900
           LittleTrap: 0

Price Vanilla Instrument

Use price to compute the price and sensitivities for the Vanilla instrument.

[Price, outPR] = price(outPricer,VanillaOpt,["all"])
Price = 75.1139
outPR = 
  priceresult with properties:

       Results: [1x6 table]
    PricerData: []

outPR.Results
ans=1×6 table
    Price      Delta        Gamma        Theta       Rho       Vega 
    ______    ________    __________    _______    _______    ______

    75.114    -0.15305    0.00025732    -3.9836    -361.67    4.6317

This example shows the workflow to price a Binary instrument when you use a Merton model and an AssetMonteCarlo pricing method.

Create Binary Instrument Object

Use fininstrument to create an Binary instrument object.

BinaryOpt = fininstrument("Binary",'ExerciseDate',datetime(2022,9,15),'Strike',100,'PayoffValue',130,'OptionType',"put",'Name',"binary_option")
BinaryOpt = 
  Binary with properties:

       OptionType: "put"
     ExerciseDate: 15-Sep-2022
           Strike: 100
      PayoffValue: 130
    ExerciseStyle: "european"
             Name: "binary_option"

Create Merton Model Object

Use finmodel to create a Merton model object.

MertonModel = finmodel("Merton",'Volatility',0.25,'MeanJ',0.02,'JumpVol',0.07,'JumpFreq',0.09)
MertonModel = 
  Merton with properties:

    Volatility: 0.2500
         MeanJ: 0.0200
       JumpVol: 0.0700
      JumpFreq: 0.0900

Create ratecurve Object

Create a flat ratecurve object using ratecurve.

Settle = datetime(2018,9,15);
Maturity = datetime(2023,9,15);
Rate = 0.035;
myRC = ratecurve('zero',Settle,Maturity,Rate,'Basis',12)
myRC = 
  ratecurve with properties:

                 Type: "zero"
          Compounding: -1
                Basis: 12
                Dates: 15-Sep-2023
                Rates: 0.0350
               Settle: 15-Sep-2018
         InterpMethod: "linear"
    ShortExtrapMethod: "next"
     LongExtrapMethod: "previous"

Create AssetMonetCarlo Pricer Object

Use finpricer to create an AssetMonetCarlo pricer object and use the ratecurve object for the 'DiscountCurve' name-value pair argument.

outPricer = finpricer("AssetMonteCarlo",'DiscountCurve',myRC,"Model",MertonModel,'SpotPrice',102,'simulationDates',datetime(2022,9,15))
outPricer = 
  MertonMonteCarlo with properties:

      DiscountCurve: [1x1 ratecurve]
          SpotPrice: 102
    SimulationDates: 15-Sep-2022
          NumTrials: 1000
      RandomNumbers: []
              Model: [1x1 finmodel.Merton]
       DividendType: "continuous"
      DividendValue: 0

Price Binary Instrument

Use price to compute the price and sensitivities for the Binary instrument.

[Price, outPR] = price(outPricer,BinaryOpt,["all"])
Price = 53.2308
outPR = 
  priceresult with properties:

       Results: [1x7 table]
    PricerData: [1x1 struct]

outPR.Results 
ans=1×7 table
    Price     Delta      Gamma     Lambda       Rho      Theta     Vega
    ______    ______    _______    _______    _______    ______    ____

    53.231    -0.831    0.54314    -1.5924    -212.88    1.8643     0  

Introduced in R2020a